SORBUS VECTOR: Manager Quarterly Commentary
The last three months the fund has performed positively. SORBUS VECTOR had a positive total return of 1.1% over a period when the MSCI UK IMI All Companies Index was down (0.6%).
One particularly pleasing note was the performance of Burberry. As regular readers will be aware, Burberry was our biggest detractor for the 12 month period to the end of September. Burberry has an iconic global luxury brand but one that we believe has been mismanaged in recent years. The now former CEO (a new CEO was appointed in July) made a strategic mistake in how he was positioning Burberry within the luxury market.
The board of Burberry outlined their strategic plan to refocus on Burberry’s core brand appeal in their interim results and the market response has so far been positive. The share price of Burberry is up 39.8% over the last quarter, making it the largest contributor to VECTOR’s performance.
Ultimately, the proof is in the pudding. There is still plenty of work to be done by the new CEO and the board to repair the damage done. Burberry finished the year around 962p per share, still well below its all time high in April 2023 of 2,641p per share (source: Bloomberg). As a first step, however, we are reassured that the company is moving in the right direction.
We have made one new addition to the fund over the last three months, Fonix. Fonix provides mobile payments and messaging services for clients across media, telecoms, entertainment, enterprise and commerce. It has a particular focus on the media and charity sectors.
Consider the various charity appeals that are advertised on TV. These advertisements often have the ability for you to text or call to make a donation. This is the service Fonix provides, supplying clients with a cloud based campaign manager and payment system. Some of its key customers include: ITV, Bauer Media, Comic Relief, Children in Need, Channel 5, Global, RTÉ, and Wireless Radio Ireland.
Fonix has a market share of over 30% of the UK phone-paid services market and a strong track record for retaining customers. The services Fonix offers are unglamorous but there are opportunities for the company to continue its growth through expansion overseas.
Fonix entered Ireland in 2023 and has been growing rapidly. In its 2024 annual report the company announced revenue growth for the Ireland market of 42.4%, where it has already emerged as a market leader. In 2025 Fonix is set to launch in Portugal. In both cases the decision to launch in new countries was driven by requests from customers. We view these requests as a positive signal.
Entering new markets always carries increased risk of failure; foreign companies can struggle to adapt to the local context (consumer tastes, laws & regulations, and distribution channels for example). Having clear demand for its services upfront helps Fonix to establish itself in these new markets reducing this risk.
A clear example of such challenges is the new Gambling Regulation Bill, approved in October by the Government of Ireland. There is uncertainty over the scope of the regulations when it applies to services provided by Fonix to some of its media clients that offer a certain type of prize draw. For the time being Fonix’s operations and earnings expectations are unaffected, but how Fonix navigates the situation will be informative of its long term potential.
Even with such potential challenges we consider Fonix an attractive investment opportunity. Fonix is a high quality business with many of the features we seek. It is capital light and has consistently and successfully generated high returns on capital, with a 5 year average Return on Invested Capital (ROIC) of 95.7%. The company is well managed and the CEO (a founder of the company) retains significant skin in the game, owning 6% of Fonix’s shares.